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Challenger Banks: Solving a Catch 22 for Refugees

 7 min read / 

Remember when online banking became a thing? Making payments from your living room was pretty cool, but if you wanted to open a new account, let alone switch banks, you still had to make the trip to the bank to talk to your advisor across heaps of forms waiting to be filled out and signed.

Fast forward to leap-year 2016: Monzo makes headlines when they accidentally crash Crowdcube on February 29 due to overwhelming demand for investing in their app-only challenger bank. Today, Monzo has more than 750,000 customers and has made the step from prepaid cards to offering full-fledged UK current accounts. Monzo operates alongside competitors like Revolut and Tandem. Among the three London-based companies, each is pursuing a different growth strategy.

Robinhood but Bigger

Revolut has focused on rapid expansion into other services, offering the ability to trade cryptocurrencies and buy investment and insurance products. The company provides clients with a GBP current account as well as an EUR IBAN account, which makes international banking very easy. Its basic infrastructure, the ability to send money internationally, at a fraction of the price charged by traditional banks, is Revolut’s main edge over its competitors. They market themselves accordingly, pointing out how much money they can save customers who regularly transfer money across borders.

Their cryptocurrency exchange with the associated wallets is supposedly the first step towards full-fledged commision free trading of traditional assets, akin to Robinhood. How safe and user-friendly their cryptocurrency platform remains to be seen. Revolut’s broad offering has secured them the pole position in the UK challenger bank market. Users can store money in up to 25 different currencies, traded at the real exchange rate. Just like their competitors, Revolut offers a majority of their services at no fees. They do stand out with their monetisation strategy, by offering added perks as part of a premium membership, something not found with competitor Monzo.

Old-School Credit Card, Millennial Interface

Tandem started out as a company offering credit card services. They use a similar rhetoric as their fellow challenger banks, offering low fees, convenience and complete transparency, along with real-time tracking of expenses and better financial planning. They even use systems to analyse spending patterns and find better deals for their customers. They added a fixed interest savings account to their credit card offering, bringing their product total to two. Their card functions like a typical credit card offered by traditional banks, whereas Monzo and Revolut offer debit services only. On one hand, it gives clients more spending flexibility by spacing out payments over time, and their savings yield interest, however, it also means that Tandem perform credit checks and requires a three-year address history in the UK. Their competitors don’t have these requirements and heavily push the no-credit-check benefit in their branding.

Explorers vs Homebodies

Out of the trio, looking to convert Brits away from the old-school banking world, Revolut currently has the most customers and is already eyeing customers overseas. Revolut has set itself up nicely for a rapid transition to becoming an international company, as they allow you to hold up to 25 currencies, traded at the real exchange rate.

Monzo has decided to hold off on expanding abroad, and instead funnel their resources into perfecting their current account. Their mission appears to lie in becoming the highest-ranked current account in the UK, and only then will they be looking to expand abroad. CEO Tom Blomfield says he wants to stick to the lessons learned during his Y Combinator days, and never lose sight of the minimum viable product (MVP) concept – in this case perfecting the product offered at home before taking on other markets.

Banking the Unbanked

Monzo’s next project stays true to this philosophy. The company is looking to offer bank accounts to refugees, as well as the UK’s homeless population. Applying for a bank account in the UK can lead to a catch 22 for those new to the country. The minimum requirement for opening a current account with a traditional bank includes proof of residence, most often in the form of a gas and electricity bill. Proof of residence can only be obtained by buying or renting in the UK, and the only way to do that is by having a bank account. Monzo, in line with other challenger banks, only requires proof of ID and a short video, recorded on a smartphone, to match to an applicant’s identification documents. This has made the bank especially popular with high-skill immigrants to the UK, as well as expats who don’t want to deal with the hassle of applying to a traditional bank.

Refugees and homeless people often do not have a form of ID that is currently accepted by the banking system. This is why Monzo is accepting alternative methods for proving identity, such as biometric residence permits for refugees. The company also wants to go a step further and accept asylum application documents, as well as letters from a homeless shelter or a benefits letter. This could be the decisive step in ending the vicious cycle of homelessness. Most tools that would give an individual a chance to escape poverty are not accessible without a bank account, including the attainment of proper accommodation.

The problem is that regulations do not permit the use of these document in an application for a UK current account. Monzo is looking to clear this hurdle by offering accounts with a slightly restricted banking experience, but still providing applicants with account number and sort code. It would be called a ‘basic’ bank account, with limits on withdrawals and no overdraft.

A Long-Term Strategy

This means that Monzo won’t be making money off basic bank accounts since they cannot profit from the interest charged on overdrafts. It does, however, give them a reputation for truly caring about all potential customers in the UK. Whether they are more motivated by philanthropy or getting first-class PR is a different question. Either way, it is evident that Blomfield is playing the long-game since basic account holders will be able to upgrade to a full current account, once they come into a more favourable financial standing. As Monzo expands their services and finds new ways to monetise, the hope would be that the unbanked of today will become the loyal customer base of tomorrow.

Creating bank accounts for refugees is Monzo’s most recent effort to work towards financial inclusion. Other measures have been aimed at supporting such areas as mental health, including ways to for clients to fight gambling addiction by opting-in to have the app block certain transactions.

Monzo’s competitors have been less vocal about reaching unbanked demographics, though their infrastructure lends itself just as well to achieving the same goal. Because each player has formulated their unique forte, it is reasonable to assume more divergence between the three as time goes on. Tandem will likely continue to head down the lending road, while Revolut is heading in the direction of commission-free brokerage combined with international banking.

While Monzo remains UK-only for the time being, Blomfield, in an interview with the Telegraph, made it clear that he wants to grow the company into a world-leading bank, despite attractive acquisition offers. Monzo’s long-term, sustainability-focused approach could go a long way towards achieving that goal, which means they might be clashing with Revolut way down the road once more, along with other international challenger banks that are going to emerge around the globe.

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